More OPEC

More OPEC

Well, as I like to say, I certainly don”t expect these columns to

win any Pulitzer”s. To wit, I really should have explained what

countries are members of OPEC before I did last week”s article.

So please accept my apology as we go back, back, back.to fill in

some gaps.

OPEC was formed at a conference held in Baghdad, September

10-14, 1960. There were five original members: Iran, Iraq,

Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975,

the organization expanded to 13 members with the addition of

Qatar, Indonesia, Libya, United Arab Emirates (UAE.as

opposed to UAB, the Univ. of Alabama-Birmingham), Algeria,

Nigeria, Ecuador and Gabon. Ecuador dropped out in December

1992 and it wasn”t until January 1995 that ministers wised up to

one of their own. At a meeting a minister turned to the

representative from Gabon and said, “By the way, where is this

place you call, Ga-bon?” Gabon”s representative, duly

embarrassed said, “I know nothing. I know not where Gabon is

myself.” With that he fled the room, never to be seen again, and

Gabon was removed from the roster.

Despite all of its press, and influence, it may surprise you to learn

that OPEC produces just 40 percent of the world”s oil. It does,

however, hold more than 77 percent of the world”s proven

reserves. OPEC also contains nearly all of the world”s excess oil

production capacity.

Non-OPEC nations thus produce nearly 60 percent of the world”s

crude oil. But non-OPEC countries have smaller reserves which

are being depleted more rapidly than in OPEC. For this reason, it

behooves these nations to continue to aggressively pursue new

energy sources.

Current non-OPEC production is concentrated in seven countries:

Canada, the United Kingdom, Norway, Mexico, China, Russia

and the U.S. Five of these seven are net exporters to the world

oil market, the U.S. and China being the exceptions. Together,

the seven account for about 60 percent of non-OPEC production,

with the U.S. and Russia being the largest. The remaining

sources of non-OPEC oil are from 14 nations, including Syria,

Brazil, Colombia and Oman.

Continuing then where we left off last week.

In March 1974 the Arab oil embargo was lifted but the event had

left its mark. American prosperity had depended in part on what

the Shah of Iran described as “the mystical power of the oil

companies,” or, the arrogance with which the industrial world, in

the role of colonial power, claimed dominion over the planet”s

natural resources.

The price of oil continued to rise throughout the ”70s. And oil

wasn”t the only commodity to do so. By 1980, other

commodities such as tin, silver and gold rose to all-time highs

while rubber, cotton and grain also rose to high levels.

In 1974 the Consumer Price Index rose to 11 percent. This was

the highest peacetime price-surge in American history. By 1975,

President Gerald Ford had unveiled his “Whip Inflation Now”

program, with its humiliating WIN buttons.

Meanwhile, between 1973 and ”78, annual revenues from oil in

the main Arab producing countries grew enormously. For

example:

Saudi Arabia”s rose from $4.35 billion to $36 billion, Kuwait”s

went from $1.7B to $9.2B, and Iraq”s increased from $1.8B to

$23.6B.

But this increase in wealth led to an increase in dependence on the

very industrialized countries they had sought to teach a lesson.

The producing countries had to sell their oil, and the industrial

countries were their main customers. In the course of the 1970s,

the excess of demand over supply came to an end, because of

economic recession, attempts to economize in fuel consumption

and increased production by countries which were not members

of OPEC.

The bargaining position of OPEC grew weaker and a high and

uniform price level was going to be difficult to maintain. And the

huge surpluses that were created in the producing nations had to

be invested somewhere so, for the most part, they were invested

in the industrial countries. They had to go to the same nations for

technical expertise in order to develop their own economies and

they sought outside help in building their armed forces.

The U.S. was also increasingly prepared to threaten force if oil

supplies were interrupted again. We were not just worried about

revolutions in the producing countries but also the extension of

Soviet influence in the region, i.e., the 1979 invasion of

Afghanistan.

After the 1973 oil embargo, Kissinger and Nixon had looked on

Iran as an important regional ally. Unlike King Faisal in Saudi

Arabia, the Shah of Iran did not use his oil to place political

pressure on the U.S., although he greatly increased its price. [The

U.S. did still supply Saudi Arabia with large amounts of aid]. In

addition, Iran allowed the U.S. to refuel ships at its ports and

continued American antagonism of the Soviet Union.

Nevertheless, the second oil crisis (which really started in 1978

when Iran led a new price increase), accelerated as a result of the

Iranian revolution [see the “Hott Spotts” archives] as well as

political reaction to the Camp David Accords between Egypt and

Israel. Oil was to hit $40 a barrel by 1981.

But eventually the price peaked due, again, to the simple forces

of supply and demand. The industrialized nations began to

develop more efficient uses of energy while OPEC failed to

maintain a united front on prices and volume of production. The

price of crude has generally been in a free fall since ”81. Even

with the recent price rise, in inflation-adjusted terms, we have a

long ways to go to begin to come close to the levels of the late

70s / early 80s.

And one interesting note from just last week. There was an item

in the Wall Street Journal concerning Russia”s Gazprom, the

world”s largest producer and exporter of natural gas. They are

proposing a cartel along the lines of OPEC to raise the price of

gas, a lot of which is used in Europe. Gazprom is looking to

reach agreements with two other major gas producers, Norway

and Algeria. If gas prices remain low, Gazprom warned, Russia

may balk at extending supply contracts in Western Europe.

Finally, what have we learned from the two price shocks of the

”70s? Little. We still import way too much oil. Asia, for

example, is back up to around 70% [from the Middle East] in

some countries. Should the global economic recovery continue,

there is no doubt that the $22 prices of today will look cheap in a

year or so.

[Sources: “Energy Information Association;” “The Great Wave,”

by David Hackett Fischer; “A History of the Arab Peoples,” by

Albert Hourani; “A Reassessment of U.S. Strategic Interests in

the Post-Gulf War Middle East,” by W. Judd Peak]

*Next week I”ll have some thoughts on the Roaring ”20s.

Brian Trumbore